Head of Equity Strategy
Summary: The earnings calendar is still light as we wait for the Q3 earnings season to start in mid-October. But next week we will get interesting earnings from US homebuilder Lennar and cruise line operator Carnival which both are experiencing headwinds from rising interest rates and the cost-of-living crisis impacting the consumer. We also take a look at the shocking news that FedEx is withdrawing its fiscal year guidance after a bad Q1 and finally we discuss the good and bad about Adobe's USD 20bn acquisition of its competitor Figma.
Waiting for Q3 earnings
The Q2 earnings rebound on the back of cost cutting and inflation combined with the recent rebound in equities made investors forget about the underlying structural headwinds for equities. Wage pressures and the inability to pass on the full rise in input costs will force companies to reduce their profit margins in the quarters to come. Lower operating margins with no change in revenue expectations and a US 10-year yield likely to be 1%-point higher by early Q2 next year will force equities.
The Q3 earnings season is just around corner starting in mid-October and here investors will get a feel of the pressure the corporate sector is experiencing. In the meantime, off calendar earnings will continue to roll in and the list below shows the most important earnings releases next week. In one of our recent equity notes we wrote that the cost-of-living crisis will severely impact consumer discretionary companies and as the most exciting earnings to watch next week are the US homebuilder Lennar and cruise line operator Carnival as both companies’ outlook is sensitive to higher interest rates and less disposable income.
FedEx shares down
The big story today is FedEx reporting preliminary FY23 Q1 results (ending 31 August) showing adjusted EPS at $3.44 vs est. $5.10 as logistic company is pressure on freight rates combined with rising input costs highlighting our margin squeeze hypothesis above. But one thing is a bad quarter, the real worry for investors is that FedEx is withdrawing its FY23 guidance suggesting the company has zero visibility of the next nine months, or that their internal forecast is so bad that they fear it would severely tank the share price. In any case, the announcement has spooked investors sending FedEx shares down 20% in pre-market trading.
Our Saxo logistics theme basket is the fifth best performing basket this year down only 8.8% and we have repeatedly said that the logistics theme is a strong long-term theme. Based on our assumption of accelerating deglobalization supply chains will likely become more fragmented across more logistical hubs and countries and as such FedEx’s guidance withdrawal for the current fiscal year is not something that makes us change our long-term view.
Quick take on Adobe acquisition of Figma
Yesterday’s big story was Adobe’s earnings release which revealed the acquisition of one of its competitors Figma for $20bn in a cash and stock deal valuing Figma at 100x the current recurring revenue. The acquisition is seen by many as overly expensive and the share price tumbled 16% to lowest levels since early 2020. Adobe’s management has naturally the best insights into the industry and must clearly have felt that Figma could severely impact Adobe’s cloud offering in the future. Acquiring Figma in a combined cash and stock deal is a good move by Adobe as it reduces the risk tied to the deal and while many argue that Adobe has overpaid many forget that Meta’s acquisition of WhatsApp also turned out to be crucial despite WhatsApp has never generated any meaningful revenue. The point is that when you have a near monopoly the most important thing is to subdue all new competitors just as Intel did in the early days of the semiconductor boom. Time will tell whether this was a bad move by Adobe, but for now the market is punishing Adobe for its move.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
